In yet another sign that the federal government is following through on its warnings about PPP loan fraud, the Department of Justice, according to reports from Reuters, has issued grand jury subpoenas to several Wall Street banks related to an investigation into PPP loans. The subpoenas were reportedly issued by the DOJ’s Fraud Section. The issuance of the subpoenas does not necessarily indicate wrongdoing by the banks. The government frequently issues subpoenas to both investigation targets and potential third-party witnesses. Although the banks were reportedly the subpoena recipients, the DOJ could be seeking information about loan applicants. As the loan processors, banks have a significant amount of information regarding the applicants and the certifications that they made. The subpoenas could be an initial step in investigating the veracity of the loan application certifications, including whether the applicants had a need for the funds. It is unclear which banks received subpoenas, but Wells Fargo disclosed in a regulatory filing this month that it received “formal and informal inquiries” from the government regarding PPP loans. DOJ has, of course, refused to comment.
The DOJ has already brought three sets of charges against individuals that have allegedly defrauded the SBA loan program, which we have covered here and here. The issuance of the subpoenas appears to be the next step in the government’s investigation. While prior charges have focused on claims of obvious fraud (i.e. applying for loans on behalf of businesses that do not exist or spending the loans on cars and jewelry), the DOJ could now be looking at an issue that has concerned many applications throughout the application process – whether the applicants actually have a need for the funds, including whether they have access to alternative sources of capital. The subpoenas could also lead to other avenues of investigations, for both the banks and applicants.
The government has made no secret of its intention to seek out companies and individuals that attempt to defraud the loan program through both audits and investigations. In a dose of good news for companies that took loans of less than $2 million, the SBA announced a new safe harbor on May 13 as part of its regularly updated loan FAQs. Under the safe harbor, “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be
deemed to have made the required certification concerning the necessity of the loan request in good faith.”
For companies that obtained larger loans and elected to keep the loan funds, particularly public companies, taking steps to ensure the loan certifications were made in good faith is critical. Applicants that made the certifications in good faith, documented their rationale for applying for the loans and instituted rigorous compliance policies to track the usage of the funds will significantly reduce the risk of facing criminal charges. Taking these steps will also leave companies better prepared for audits and civil investigations.
